After previously announcing plans to withdraw at least $15 billion to fund 2017 budget deficits, the $860 billion Norwegian sovereign wealth fund announced last December that it would change it's portfolio allocations to try to make up for the withdrawals. The change would eventually result in 75% of the fund's capital being allocated to global equities, up from the previous 60% allocation...you know, because equities never go down so more is always better.
Now it seems that, at least for now, that bet has paid off to the tune of about $53 billion or 6.9% of the fund's AUM. Meanwhile, the fund's CEO, Yngve Slyngstad, attributed the gain to the Trump rally saying that "after the presidential election in the U.S., markets priced in higher growth and inflation in the global economy." Per Bloomberg:
The $900 billion Government Pension Fund Global returned 6.9 percent in 2016, after rising 2.7 percent the previous year, the Oslo-based investor said on Tuesday. Stocks gained 8.7 percent, bonds rose 4.3 percent, and real estate investment grew 0.8 percent.
“The fund returned 6.9 percent after a year of political events and uncertainty,” Chief Executive Officer Yngve Slyngstad said in the statement. “All of the fund’s asset classes generated positive returns, but it was the strong equity return in the second half of the year that drove the fund’s results.”
“After the presidential election in the U.S., markets priced in higher growth and inflation in the global economy,” Slyngstad said.
Of course, the gains came after the Norwegian government was forced to withdraw capital over the past two years to fund budget deficits that are expected to reach over 8% of GDP.
The withdrawals accelerated just as the heavily oil-dependent economy of Norway started to absorb the impact of lower oil prices.
In a previous interview with Bloomberg, Egil Matsen, the Deputy Governor at Norway’s Central Bank, said the withdrawals were starting to impact the manner in which the fund manages its risk profile.
"Relevant for how we think about the risk-bearing capacity of the fund. Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?”
But Finance Minister Siv Jensen dismissed criticism of the withdrawals saying that the administration is using the fund as was intended noting that withdrawals remain below the fund's annual return target of 4%.
“Now that we are in an extraordinary situation, hit by the biggest oil price shock in 30 years, it would be crazy if we didn’t have an expansionary fiscal policy,” she told Bloomberg. Jensen rejected suggestions that the fund was “vulnerable.” She described it as “rock solid.”
The fund’s managers have warned it’s getting harder to live up to a real return target of 4 percent. It has returned 3.44 percent over the past 10 years. For now, planned withdrawals aren’t big enough to force the fund to sell assets. It estimates income from dividends, real estate and bonds will reach 207.5 billion kroner next year, almost double the amount the government plans to withdraw.
But there is no risk in equity investing, right? In fact, we just found another $40 billion that will be pumped into the global equity bubble promptly.